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Chapter 01 Cost Accounting: Information for Decision Making

True / False Questions

1. The value chain comprises activities from research and development through the production process, but does not include activities related to the distribution of products or services. True False

2. Administrative functions are not included as part of the value chain because they are implicitly

included in every business function. True False

3. Under the value chain concept, instead of perceiving whether individual activities in the chain add

value, customers only consider the overall utility of the goods or services they purchase. True False

4. A cost driver is a factor that causes costs.

True False

5. A cost can be considered a differential cost for one particular course of action but not for another

course of action. True False

6. A responsibility center can be a department, division, or segment, but not a subsidiary of the

parent company. True False

7. It is important that the manager assigned to lead a responsibility center be held accountable for its

operations. True False

8. Budgeting is primarily used to determine year-end bonuses based on managerial and

organizational performance. True False


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9. Managers are usually responsible for the revenues needed to achieve the targets set during the budgeting process, but not the resources consumed to achieve those targets. True False

10. Cost data can be used for one managerial decision but not for another managerial decision.

True False

11. Financial accounting information is designed for decision-makers who are directly involved in the

daily management of the firm. True False

12. It is more important for financial accounting information to be comparable between firms than to be

useful for managerial decision-making. True False

13. Cost accounting information developed for managers to use in making decisions must comply with

generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). True False

14. Cost accounting information can be used by managers to defraud customers, creditors, and

owners. True False

15. Benchmarking is a continuous process of measuring a company's products, services, or activities

against competitors' performance. True False

16. Activity-based costing (ABC) is a management tool that focuses on the continuous improvement of

all dimensions of a business. True False

17. Customer satisfaction is an example of a non-financial performance measure.

True False

18. Managers face ethical situations on a daily basis, while accountants face them infrequently.

True False


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19. A person who makes unethical decisions in their personal life is likely to make unethical decisions in their professional life. True False

20. Ethical behavior depends more on a firm's code of conduct than the individual's personal beliefs.

True False

21. The Value chain is comprised of the activities that take place during the production process.

True False

22. Cost accounting plays a significant role in management decision making.

True False

23. Cost accounting provides information only for cost accounting purposes.

True False

24. Cost accounting is broader in scope than financial accounting.

True False

25. Financial accounting receives information only from cost accounting activity.

True False

26. Financial accounting provides financial and nonfinancial information that helps managers in the

decision making process. True False

27. A value chain consists of the major subassemblies that add value to a product.

True False

28. The lean thinking model focuses on reducing defects to as close to zero as possible.

True False

Mult iple Choice Questions


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29. The set of activities that transforms raw resources into the goods and services of an organization is called: A. Value chain.

B. Supply chain.

C. Demand chain.

D. Cost-benefit analysis.

30. Which of the following activities would not be considered a value-added activity?

A. Production

B. Marketing

C. Accounting

D. Distribution

31. Which of the following statements is false?

A. In essence, the value chain and the supply chain are similar; each creates something for which

the customer is willing to pay.

B. Accounting systems are important because they provide all the information for decisions commonly made by managers.

C. The supply or distribution chain is a linked set of organizations that exchange goods and services in combination to provide a final product or service to the customer.

D. Eliminating nonvalue-added activities always reduces costs without affecting the value of the product to customers.

32. Managers do not make decisions about future events based on:

A. Perfect information.

B. Estimated information.

C. Actual information.

D. Financial information.

33. Which of the following is a nonvalue-added activity?

A. Product design

B. Customer service

C. Research and development

D. Rework of defective items


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34. (CMA adapted) An accounting system that collects financial and operating data on the basis of the underlying nature and extent of cost drivers is A. full-absorption costing.

B. activity-based costing.

C. variable costing.

D. benchmarking.

35. (CMA adapted) Cost drivers are

A. activities that cause costs to increase as the activity increases.

B. accounting techniques and practices used to control costs.

C. accounting reimbursements used to evaluate whether performance is proceeding according to plan.

D. a mechanical basis, such as machine hours, computer time, or factory square footage, used to assign costs to activities.

36. During 2013, the JKL Restaurant had sales revenues and food costs of $800,000 and $600,000,

respectively. During 2014, JKL plans to introduce a new menu item that is expected to increase sales revenues by $100,000 and food costs by $40,000. Assuming no changes are expected for the other food items, operating profits for 2013 are expected to increase by A. $260,000.

B. $100,000.

C. $60,000.

D. $40,000.

37. (CMA adapted) The process of creating a formal plan and translating goals into a quantitative

format is referred to as A. budgeting.

B. benchmarking.

C. cost-benefit analysis.

D. value-added analysis.

E. activity-based costing.


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38. The field of accounting that depends on generally accepted accounting principles (GAAP) is called A. cost accounting.

B. financial accounting.

C. managerial accounting.

D. responsibility accounting.

E. international accounting.

39. Which field of accounting emphasizes relevancy over comparability?

A. Cost accounting

B. Financial accounting

C. Responsibility accounting

D. International accounting

40. The just-in-time (JIT) method of production focuses on

A. increasing sales revenue.

B. reducing inventories.

C. increasing customer service.

D. reducing operating expenses.

E. increasing product quality.

41. (CIA adapted) The primary reason for adopting total quality management (TQM) is to achieve

A. reduced delivery time.

B. reduced delivery charges.

C. greater customer satisfaction.

D. greater employee participation.

E. better managerial decisions.

42. According to the Institute of Management Accountants (IMA), the final step in resolving an ethical

dilemma is to A. resign from the organization.

B. call the IMA's ethics hotline.

C. report the circumstances to a local newspaper.

D. consult with an objective, independent advisor.

E. discuss the situation with an immediate supervisor.


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43. According to the Institute of Management Accountants (IMA), the first step in resolving an ethical dilemma is to A. resign from the organization.





44. Which of the following is not one of the basic standards of the Institute of Management

Accountants (IMA) Code of Ethics? A. Competence

B. Confidentiality

C. Honesty

D. Integrity

E. Credibility

45. Which of the following is not one of the overarching ethical principles of the Institute of

Management Accountants (IMA) Code of Ethics? A. Competence

B. Responsibility

C. Honesty

D. Objectivity

E. Fairness

46. The financial plan of the revenues and resources needed to carry out activities and meet financial

goals is called A. performance measure.

B. benchmarking.

C. budgeting.

D. responsibility center.

E. lean accounting.


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47. The cost accounting system that minimizes wasteful or unnecessary transaction processes is A. performance measure.

B. benchmarking.

C. budgeting.


E. lean accounting.

48. Continual process of measuring a company's own products, services or activities against

competitors' performance is A. performance measure.

B. benchmarking.

C. budgeting.


E. lean accounting.

49. The costing method that first assigns costs to activities and then assigns them to products based

on the products' consumption of activities is called A. lean accounting.

B. responsibility centers.

C. activity-based costing.

D. budgeting.

E. outsourcing.

50. Having one or more of the firms' activities performed by another firm or individual in the supply or

distribution chain is called A. lean accounting.



D. budgeting.

E. outsourcing


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51. The system that identifies the costs of producing low-quality items is called A. customer relationship management.

B. distribution chain.

C. total quality management.

D. cost of quality.

E. enterprise resource planning.

52. The system that allows firms to target profitable customers by assessing customer revenue and

costs is called A. customer relationship management.



D. cost of quality.


53. Information technology that links the various processes of the company into a single

comprehensive information system is called A. customer relationship management.



D. cost of quality.


54. A management method by which the organization seeks to excel on all dimensions of quality is

called A. customer relationship management.



D. cost of quality.



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55. Which of the following is not a key financial manager in an organization? A. Chief financial officer

B. Treasurer

C. External auditor

D. Controller

E. Cost accountant

56. Which of the following is not normally considered part of the value chain?

A. Research and development

B. Purchasing

C. Administration

D. Distribution

E. Customer service

57. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while costs were

$750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in costs. Assuming no changes are expected for the other services, operating profits are expected to increase by A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.

58. In 2013, the MoreForLess Company had revenues of $2,000,000 and costs of $1,500,000. During

2014, MoreForLess will be introducing a new product line that is expected to increase sales revenue by $200,000 and costs by $160,000. Assuming no changes are expected for the other products, the operating profits are expected to increase by A. $540,000.

B. $200,000.

C. $160,000.

D. $40,000.


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59. Moving of inventory is an example of a(n) A. cost-benefit analysis.

B. value-added activity.

C. activity-based cost.

D. nonvalue-added activity.

60. Costs that change in response to a particular course of action are

A. differential costs.

B. cost-benefit analysis.

C. activity-based costs

D. cost drivers.

61. Which of the following activities would not be included in the value chain of a manufacturing

company? A. Research and Development

B. Customer Service

C. Design

D. Accounting

62. A firm's replies to customers' questions via email would be an example of which element of the

value chain? A. Customer Service

B. Marketing

C. Design

D. Supply

63. The delivery of products or services to customers is an example of which element in the value

chain? A. Production

B. Design

C. Marketing

D. Distribution


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64. The extended value chain: A. is a set of consecutive operations or processes that begins with purchasing resources and ends

with providing products or services that customers value.

B. is a related set of tasks, manual or automated, that transforms inputs into identifiable outputs.

C. incorporates how companies obtain their resources and distribute their products and services, using the services of other organizations.

D. is a technique for identifying opportunities for improvement and measuring the effects of proposed improvements by comparing both the costs and benefits of a proposal.

65. Manufacturing firms use the value chain to take steps to improve the overall profitability of the firm

by: A. placing greater emphasis on the value chain.

B. moving to an emphasis on upstream activities in the value chain.

C. moving to an emphasis on downstream activities in the value chain.

D. finding low-cost manufacturing locations.

66. During which step of the value chain process will a manufacturing company determine whether or

not it has added utility? A. The Design component

B. The Purchasing process

C. The Production activity

D. Added utility occurs in all steps.

67. Which of the following types of organizations can most benefit from the implementation of value

chain? A. Service firms

B. Not-for-profit organizations

C. Manufacturing firm.

D. All types of organizations can benefit from the implementation of value chain


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68. Which of the following statements concerning the value chain is false? A. The goal of a value chain is to find areas where a company can either add value or reduce cost.

B. The value chain focuses on the entire production process, as well as the sale of the product and service after the sale.

C. If a company cannot compete in a specific area of the value chain, it might outsource that portion of the value chain to another entity which can perform it better.

D. Successful firms are ones that operate within the entire value chain, thereby overseeing every aspect of the value chain for the customer.

69. Which of the following could be considered part of the value chain in a service firm?

A. Inspection of product

B. Advertising

C. Raw materials

D. Distribution

70. Place the four components in the order they appear along the value chain: A = Customer service;

B = Design; C = Distribution; and D = Production. A. ABDC

B. ACDB

C. BDCA

D. BADC

71. The value chain is the order of business components in which:

A. value is deducted from the products or services of a business.

B. value is proportionally added to the products or services of a business.

C. products or services are evaluated according to their value to the distribution chain.

D. utility is added to the products or services of an organization.

72. Cost accounting

A. provides information on material usage.

B. provides information on the profitability of customer orders.

C. provides information on the efficiency of service department labor.

D. All of these.


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73. Financial accounting A. focuses on the future.

B. must comply with GAAP (generally accepted accounting principles).

C. reports include detailed information on the various operating segments of the business.

D. is prepared for the use of management.

74. The individual who would most likely use only financial accounting information in making decisions

is a A. vice president of marketing.

B. factory supervisor.

C. department manager.

D. company stockholder.

75. The financial accounting system is the primary source of information for

A. decision making on the factory floor.

B. improving the performance level of customer service.

C. planning the budget for next year.

D. preparing the income statement for stockholders.

76. Cost accounting provides all of the following with the exception of

A. pricing information from marketing studies.

B. nonfinancial information regarding the cost of operational efficiencies.

C. financial information on the cost of acquiring resources.

D. information for managerial accounting and financial accounting.

77. The primary objective of financial accounting is

A. profitability analysis.

B. providing information for management decision making.

C. cost planning and cost controls.

D. reporting to investors, creditors, and government authorities.


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78. Financial accounting provides a historical perspective, while cost accounting emphasizes A. reporting to stockholders.

B. a current perspective.

C. the future.

D. past transactions.

79. Which of the following does not represent a main focus of cost management information?

A. Internal auditing and control

B. Performance measurement

C. Planning and decision making

D. Preparation of financial statements

80. Surf Boards, Inc. had the following summarized results for the month ending July 30:

As the cost accountant, which single note to the above financial results is most appropriate in the report to management? A. The departmental manager is performing to expectations because budgeted income equals

actual income.

B. Revenues are above budget and a bonus based on this increase should be considered.

C. Costs as a percentage of revenues are above budget and a further scrutiny of the results might be appropriate.

D. Costs are 17.5% above budget and the department manager's position should be critically evaluated by senior management.


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Assume that the budget was based on the sale of 104 surfboards at $500 each and the actual results reflect the sale of 104 surfboards. What is the most appropriate conclusion in the report to management? A. If costs as a percentage of revenues had remained at the budgeted level, net income would

have declined.

B. If costs as a percentage of revenues remain at the actual level any increase in revenues would probably be matched by a decrease in net income.

C. If costs as a percentage of revenues had remained at the budgeted level, net income would be $985 above budget.

D. If costs as a percentage of revenues had remained at the budgeted levels, net income would be $4,000 above budget.


Assume that an additional 10 surfboards were sold at the regular price, during additional store opening hours. What is the most appropriate conclusion in the report to management? A. The budget should be updated to take into account the change.

B. The additional hours were needed, as net income increased.

C. An analysis of the differential costs of the additional store hours should be undertaken prior to drawing a conclusion as to the success of the change.

D. All of these.


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83. Lucena Corporation purchased a machine 7 years ago for $339,000 when it launched product X05K. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 360 machine costing $353,000 or by a new model 280 machine costing $332,000. Management has decided to buy the model 280 machine. It has less capacity than the model 360 machine, but its capacity is sufficient to continue making product X05K. Management also considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If that were done, the $332,000 invested in the new machine could instead have been invested in a project that would have returned a total of $426,000. In making the decision to buy the model 280 machine rather than the model 360 machine, the differential cost was: A. $21,000.

B. $87,000.

C. $7,000.

D. $14,000.

84. A responsibility center has a manager assigned to lead the unit, taking responsibility for the unit's

operations and resources, and the unit may be called a A. department.

B. division.

C. segment.

D. All of these.

85. Al's Brake Shop had sales revenues and operating costs in 2014 of $650,000 and $525,000,

respectively. In 2015, Al's plans to expand the services it provides to customers to include lubrication services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing brake business, operating profits would be expected to increase during 2015 by A. $125,000.

B. $85,000.

C. $160,000.

D. $35,000.


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86. Al's Brake Shop had sales revenues and operating costs in 2014 of $650,000 and $525,000, respectively. In 2015, Al's plans to expand the services it provides to customers to include lubrication services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing brake business, what is the amount of operating profits that are expected be earned in 2015? A. $125,000

B. $85,000

C. $160,000

D. $35,000

87. The goals and objectives of establishing budgeting in an organization include all of the following

except: A. the ability to decide whether goals can be achieved.

B. the resources needed to carry out its tasks.

C. anticipated revenues to be generated.

D. the consistent application of generally accepted accounting principles.

88. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while operating costs were

$750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential operating costs for 2014 will be A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.

89. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while operating costs were

$750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential revenue for 2014 will be A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.


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90. San Juan, Inc. is considering two alternatives: A and B. The costs associated with the alternatives are listed below:

Are the materials costs and processing costs differential in the choice between alternatives A and B? (Ignore the building costs and equipment rental in this question.) A. Neither materials costs nor processing costs are differential.

B. Both materials costs and processing costs are differential.

C. Only processing costs are differential.

D. Only materials costs are differential.

91. San Juan, Inc. is considering two alternatives: A and B. The costs associated with the alternatives

are listed below:

If only the differential costs of the two decisions are considered, the total cost of Alternative B is A. $161,000.

B. $131,500.

C. $59,000.

D. $102,000.


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92. Two alternatives, identified A and B, are under consideration at Hayden Corporation. Costs associated with the alternatives are listed below.

Are the materials costs and processing costs differential in the choice between alternatives A and B? (Ignore the building costs and equipment rental in this question.) A. Both materials costs and processing costs are differential

B. Only materials costs are differential

C. Only processing costs are differential

D. Neither materials costs nor processing costs are differential

93. Two alternatives, identified X and Y, are under consideration at Hayden Corporation. Costs

associated with the alternatives are listed below.

What is the differential cost of Alternative Y over Alternative X? A. $140,000

B. $123,000

C. $34,000

D. $106,000

94. Which of the following cost accounting methods does not help firms keep the supply chain "lean"

and add value throughout the chain? A. Target costing

B. Activity-based costing

C. Throughput-costing

D. Performance measures


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95. An Enterprise Resource Planning System can best be described as A. a collection of programs that use a variety of unconnected databases.

B. a single database that collects data and feeds it into applications that support each of the company's business activities, such as purchases, production, distribution, and sales.

C. a database that is primarily used by a purchasing department to determine the correct amount of a particular supply item to purchase.

D. a sophisticated means of linking two or more companies to facilitate their planning processes.

96. The approaches and activities of managers in short-run and long-run planning and control

decisions that increase value for customers and lower costs of products and services are known as A. value chain management.

B. enterprise resource planning.

C. cost management.

D. customer value management.

97. R&D, production, and customer service are business functions that are all included as part of

A. the value chain.

B. benchmarking.

C. marketing.

D. the supply chain.

98. Cost leadership can improve on execution through

A. improved automation and a higher output of products.

B. benchmarking and total quality management.

C. cost cutting and downsizing of personnel.

D. improvements in product development.

99. All of the following are examples of total quality management practices except

A. redesign of a product to reduce its parts by 50 percent.

B. reduction in the movement required in a manufacturing job.

C. separating the sales and services functions.

D. raising raw material quality standards.


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100. Which area(s) of a business can be improved by using a just-in-time (JIT) system? A. Production, purchasing, and delivery

B. Production only

C. Purchasing only

D. Production and purchasing only

101. The ________ is primarily responsible for cost accounting and financial accounting.

A. COO (Chief Operating Officer)

B. CIO (Chief Information Officer)

C. treasurer

D. controller

102. All of the following individuals would report to the Chief Financial Officer (CFO) except the

A. controller.

B. internal auditor.

C. production manager.

D. treasurer.

103. Examples of the controller's functions include all except

A. cost accounting policies.

B. budgeting.

C. investor relations.

D. general ledger.

104. Cost accounting is an integral part of the ________ function in an organization.

A. treasurer's

B. controller's

C. internal auditor's

D. president's


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105. All of the following actions enhance the new focus on making cost accounting information more relevant in helping a firm achieve strategic goals except A. increasing emphasis on the management accountant as a business partner.

B. increasing emphasis on external financial reporting.

C. decreasing emphasis on financial statement inventory cost valuation.

D. increasing emphasis on timely and useful information.

106. All of the following are examples of total quality management practices except

A. redesign of a product to reduce its parts by 50 percent.




107. The Institute of Management Accountants' (IMA) standards of ethical conduct for management

accountants includes the elements of A. competence, confidentiality, integrity, and relevance.

B. competence, confidentiality, integrity, and credibility.

C. competence, confidentiality, independence, and objectivity.

D. competence, accuracy, integrity, and independence.

108. According to the IMA Code of Ethics, what should a management accountant do if a significant

ethical situation can't be resolved? A. The accountant should confront the guilty party and demand the unethical action be stopped.

B. The accountant should try to rationalize and understand the position of the other party.

C. The accountant should say nothing about the matter until he or she has retired.

D. The accountant should first discuss the matter with the immediate supervisor.

109. With the enactment of the Sarbanes-Oxley Act of 2002, all public companies are now required by

the SEC to disclose whether or not the company has A. an audit committee.

B. human resources guidelines.

C. a code of ethics.

D. a management compensation plan.


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110. Which of the following is not an ethical standard of competence in the Standards of Ethical Conduct for Management Accountants? A. Development of professional knowledge and skills

B. Preparation of complete and clear reports and recommendations of relevant and reliable information

C. Refraining from engaging in activities that would discredit the profession

D. Performing professional duties in accordance with relevant laws, regulations and technical standards

111. The Sarbanes Oxley Act of 2002 requires an effective internal control system for publicly owned

firms. Therefore, with regards to strategic investment decisions, it is important that management consider including A. internal audits of strategic decisions.

B. a code of ethics.

C. a system of preparing and reporting on investment decision.

D. All of these.

112. Where there is a lack of good performance measures, it is difficult to motivate managers by using

A. performance-based incentives.

B. monetary rewards.

C. compensation.

D. rewards for products.

113. Which of the following is a true statement regarding performance evaluation?

A. Managers should be evaluated on those things over which they have influence.

B. Managers should be evaluated on the performance of the entire organization.

C. Sales personnel do not have complete control over the level of sales.

D. Managers should not be evaluated on those things over which they have influence, if they do not have complete control over them.

Essay Questions


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114. Honda incurs many types of costs in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.


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115. Northern King is an integrated provider of genetically engineered corn. Many types of costs are incurred in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.


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116. Cindy's Limo Service provides transportation services in and around Middleville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $275,000 per year. The total cost to lease additional delivery vehicles from the local dealer is $60,000 per year. The present manager will continue to supervise all services. However, labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the package delivery service is added.

a. Prepare a report of the differential costs and revenues if the delivery service is added. b. Should management start up the delivery service? Explain your answer.


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117. Looman Inc. is a management consulting firm that specializes in management training programs. In-Line Manufacturing Inc. has approached Looman to contract for management training for a one-year period. Last year's income statement for Looman is as follows:

To satisfy the In-Line contract, another part-time trainer will need to be hired at $42,000. Supplies will increase by 12% and other costs will increase by 15%. In addition, new equipment will need to be leased at a cost of $2,500. a. What are the differential costs that would be incurred if the In-Line contract is signed? b. If In-Line will pay $55,000 for one year, should Looman accept the contract? Explain your answer.


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118. The Anderson Company reported the following results for the manufacture and sale of one of its products known as Bangers during the most recent year.

The Anderson Company is trying to determine whether or not to discontinue the manufacture and sale of Bangers. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The building costs represent the costs of production facilities and equipment that the Bangers product shares with other products produced by Anderson. If the Bangers product were dropped, there would be no change in the building costs of the company. Management has determined that discontinuing the manufacture and sale of Bangers will have no effect on the company's other product lines. Determine the change in operating profits that will happen if the manufacture and sale of Bangers is discontinued.


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119. The management of Godzilla Corporation is considering dropping product XYZ123. Data from the company's accounting system appear below:

All building expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the building expenses and $48,000 of the selling and administrative expenses will not be incurred if product XYZ123 is discontinued. a. According to the company's accounting system, what are the operating profits earned by product XYZ123? b. What would be the impact on the company's overall operating profits if product XYZ123 is dropped? Should the product be dropped?


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120. The management of Mystical Corporation has been concerned for some time with the financial performance of its product E35R and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:

In the company's accounting system all building expenses of the company are fully allocated to products. Further investigation has revealed that $95,000 of the building expenses and $85,000 of the selling and administrative expenses will not be incurred if product E35R is discontinued. a. According to the company's accounting system, what are the operating profits (losses) earned by productE35R? b. What would be the effect on the company's overall operating profits if product E35R is dropped?


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121. Place the letter of the appropriate element of an organization's value chain in Column 2 in the blank next to each operation in Column 1.


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122. 131 Flavors is a local ice cream shop. The company currently is showing an operating loss, as evidenced by the income statement below:

The President of the company is considering adding sandwiches to the menu. Sales will be expected to increase by $60,000. The cost of sandwich supplies would be $30,000. Labor costs would increase 40% and other costs 10%. The current manager will continue to manage the operation. a. Prepare a quantitative analysis of the decision to add sandwiches to the menu. b. What qualitative considerations should the company consider in this decision?


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123. The Callahan family currently lives in a suburb of a major city. They have a lovely home close to major routes of transportation. Both Mr. and Mrs. Callahan have convenient commutes of 30 minutes or less. Because the school system in their town does not have a quality reputation, they currently send their daughter to private school, conveniently located less than one mile from their home. The family's current monthly living expenses are listed below:

The Callahans are considering moving to a town approximately 20 minutes away. Because of the desirability of the local schools and strict zoning, housing is very expensive in this town. Their daughter would attend public schools. The Facts estimate that their monthly mortgage, taxes and insurance would increase to $7,000 per month, while the cost of running automobiles would increase 20% and other utilities 10%. Mortgage interest costs are tax deductible and the Facts are in the 25% tax bracket. Assume that $700 of the increase in their monthly budget is for mortgage interest. What are the costs and benefits of moving? Which can be quantified and which cannot?


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124. Place the letter of the appropriate business function of the value chain in Column 2 in the blank next to each cost item in Column 1.


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125. Springfield Manufacturing produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: materials, labor, and support costs. Total support costs for January were $300 million, and were allocated to each product on the basis of labor costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Bertha, was:

a. Compute the manufacturing cost per unit for each product produced in January. b. Suppose production will be reduced to 30,000 units in February. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January; it is not necessary to calculate the exact February unit cost. Briefly explain your reasoning.


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126. The list of representative cost drivers in the right column below are randomized with respect to the list of functions in the left column. That is, they do not match.

Required: Match each business function with its representative cost driver.


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127. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify the following for the restaurant management: a. Costs that are relevant to this decision. b. Costs that would not be differential to this decision. c. Any qualitative factors that should be considered.

128. You have been employed as an entry-level management accountant for a little under a year. You

suspect that your immediate supervisor is involved in a significant fraud involving diverting of company assets to personal use. Briefly describe the steps you might take to resolve this dilemma.

129. Healthy Dog, Inc., currently manufactures three different types of scientifically balanced dog food.

The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?


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130. Comstock Mining Company mines iron ore for production into various metal products. During recent years, the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders, the company has the technology to quickly shift production from one product to another. Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.

131. JIT is a large, publicly held Corporation. The company does about 80% of its work in government

contracts. All contracts use a cost plus fixed fee basis; costs of jobs are agreed upon by contract. Any overruns will result in losses to the company. The company controller, Brendan Behan CPA, CMA, is discussing two current jobs with the Job Supervisor, Ashlee Beth. Job 100 is currently coming in under budget, but due to construction problems, Job 102 is 20% over budget. Behan is considering the possibility of having employees who work on Job 102 record their time to Job 101. What are the implications of this decision?


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132. The owner of a small retail business asks, "Why do I need cost accountants? My CPA produces financial statements, which are sufficient for me to discover my costs. Look at my Income Statement. I expect sales to increase by 10% next year, so I am planning on a 10% increase in profits. I don't need a cost accountant to tell me that."

Use your knowledge of the concept of differential costs and explain why a cost accountant would question the conclusion that a 10% increase in sales would yield a 10% increase in profit.

133. Create a diagram of the value chain by putting the following components into the correct order: a)

purchasing; b) marketing and sales; c) research and development; d) customer service; e) distribution; f) design; g) production.


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134. Explain the difference between a value chain, a supply chain, and a distribution chain.

135. Compare financial accounting and cost accounting using the following concepts: users of the

information; important criteria; who establishes or defines the system; and how to determine an accounting treatment.

136. The IMA Code of Ethics describes three basic steps a cost accountant should take when faced

with an ethical conflict: Discuss, clarify, and consult. Describe each of these three steps.


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137. Respond to this comment: "Since cost accountants just prepare accounting data for internal management, cost accountants do not need to be concerned with GAAP or IFRS."

138. What are characteristics of information used in decision making?


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139. The Finger Curl is a small but prosperous hair cutting salon. Sally Henry, the manager of the salon, has been asked by several clients if she will ever offer other "hair related" services (e.g., perm, dye, etc). After careful thought, Henry is considering expanding her offerings. However, in order to do so, she will have to hire one additional stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by 20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues from additional services are likely to be $55,000 for the next year (i.e., 2013). The Finger Curl's income statement for the most recent year is presented below. Required: a. Based on your financial analysis, should Sally Henry go ahead with the expansion? b. What other factors must Henry consider before making a final decision?

a. Based on your financial analysis, should Sally Henry go ahead with the expansion? b. What other factors must Henry consider before making a final decision?


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140. The manager of a profit center of a large electronics manufacturing corporation made some projections regarding sales and profits for the upcoming final quarter of the year. The managers' performance evaluation and compensation depended significantly on his ability to meet budget goals. The manager discovered that the final quarter would have to be a particularly good quarter in order to meet these goals. He decided to implement a sales program offering liberal payment terms in order to pull some sales that would normally occur next year into the current year. Customers accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he sold some equipment that was not being used and realized a significant profit on the sale. Are these actions ethical? Why or why not?

141. The controller of one division of a large diversified firm is compensated by salary plus bonus. The

bonus is a significant part of total compensation, and is based directly on the profits of the division. Thus, the controller has an incentive to find ways to increase profits, including the delay of discretionary expenses such as research and development, delay of maintenance and repair of manufacturing equipment, and delay of sales promotions. Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if anyone?


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142. Brookside Shoe Company, a manufacturer of women's shoes, recently implemented a quality improvement program aimed at streamlining the manufacturing process. Carl Anderson industrial engineer and a resident expert on process improvement, was assigned the task of implementing the program. Anderson's first task was to educate all the employees involved with the production process. He sent a memo to representatives in product design and development, materials management (including purchasing), marketing, distribution, customer service and accounting, in addition to those in the production department, inviting them to attend an information session on the improvement program. He began the meeting by thanking all those who were present (over 35 in number) and spent the first hour explaining the need for such a program. Soon after, the attendees were engaged in a discussion. Several questions were raised during the discussion. Among these, three questions stood out. 1. What is the need for including members from design, marketing, and other functional areas when the improvement program's focus is on streamlining the manufacturing process? 2. What is the role of the cost management expert in this program? 3. Finally, why should the machine operators be involved, as they are not engineers? Consider the three questions that stood out in the discussion. Assume the role of Carl Anderson and prepare a response addressing the questions.


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143. Sandra Pilsden, the Vice-President for Human Resources in Learning, Inc. was concerned about a recent memo she had recently received from the CEO's office regarding the possibility of outsourcing the payroll function to Salary Experts, a growing provider of a variety of human resource services. She was shocked that the CEO's office had discussed this matter with the Board of Directors, but failed to consult her. Linden was preparing for a meeting with the CEO. In reading the memo and its attachments, Linden observed the following comparison of costs in a report prepared by the controller's office:

Pilsden also noted that Salary Experts quoted a fixed fee of $125,000 and variable processing costs of $7.50 per employee transaction. She did not believe that the company will actually save money by outsourcing the payroll function. For one, she did not think that the company will actually save all of the above mentioned amounts. She knew that the payroll department manager could not be removed from the company because he had to oversee the payroll function and serve as a liaison with the outside company. However, all other employees in the department would likely not be required. a. Assume Learning Toys has 14,000 employees on its payroll. Can the company save money by outsourcing the payroll function? b. What are the pros and cons of outsourcing the payroll function?


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144. Levis Strauss and Co., maker of Levi's familiar 501 and 505 brands of jeans, also make a "Signature" brand that was introduced several years ago for discount retailers such as Wal-Mart. Levi's strategy with the new jeans was to sell a competitively priced pair. The jeans were to be about one-half the price of the familiar 501 and 505 jeans. To get costs down Levi's would: • Use cheaper fabrics and materials. • Shun costly mass-market advertising. • Strictly limit the number of fits, styles, and colors. • The Signature brand had a good first year of sales; assume that results for the second year and later are not yet in. a. Assess the new strategy at Levi. What do you think are the potential benefits and risks? b. How will the firm's value chain and balanced scorecard change as a result of the new strategy?

145. Mr. Lee is the production Manufacturing Manager of Cathy Company. It is the beginning of the

month and he storms into the controllers department, clutching a large folder of reports. "Why am I getting so many reports? I don't need them nor do I want all the details. I've delegated responsibility to my managers so I don't have to worry about details. You've got to do something about this, John." John, the controller, starts to think about the problem that seems to have come about as the company decentralized with many layers of responsibility. He has a vague memory of something he learned from his old cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce the paper flow. Briefly describe the concept of the hierarchy of performance reports.


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146. Adair Company has been busy over the first few years of its existence in penetrating its market and gaining a respectable market share. To facilitate this, Mr. Adair, the CEO, and his controller, Mr. Brown, have been developing the annual master budgets. To date this approach has worked well. Adair has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Horwitz, has suggested to Mr. Adair that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Adair agreed to readily. Mr. Horwitz explained to Adair's departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process. a. What benefits will accrue to Adair under this new budgeting system? b. What behavioral issues might arise for departmental managers and for production workers? c. What is the most probable long-term reaction of Adair's people to the participative budget system?

147. Traditionally, companies in the United States have employed a "push" manufacturing style.

Studies in Activity Based Management and Quality Control have indicated that this approach is filled with many non-value-added activities, which increase overall costs and reduce profits. The "push" style is being replaced with a "pull" approach. Briefly describe the major differences between the push and pull approaches. What non-value added activities are eliminated in a pull manufacturing system?


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148. The New York Times recently reported that a number of publicly-held corporations have been accused of illegally doctoring hourly employees' time records. Examples included: • Workers sued Family Dollar and Pep Boys, accusing managers of deleting hours from their time records. • More than a dozen former Wal-Mart employees said in interviews and depositions that managers had altered time records to shortchange employees. • The Department of Labor reached two back-pay settlements with Kinko's photocopy centers after finding that managers had erased time for 13 employees. When interviewed, many of the managers cited pressure from upper-management and the impact of their actions on their own compensation as underlying causes for their actions. All of the companies strongly denied encouraging such illegal and unethical behavior by managers. Compensation experts interviewed agreed that the companies' incentive performance systems may have contributed to the managers' behavior. (New York Times , Apri l 4, 2004) a. Explain how the incentive performance systems of the above named companies could have contributed to this illegal behavior by managers. b. Discuss the ethical issues involved in the design of incentive performance systems. In designing a performance-based incentive system, what measures should companies take to avoid illegal and unethical behavior by supervisors?


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Chapter 01 Cost Accounting: Information for Decision Making Answer Key

True / False Questions

1. The value chain comprises activities from research and development through the production process, but does not include activities related to the distribution of products or services. FALSE

Distribution is included in the value chain.

AACSB: Analytic

AICPA BB: Industry Blooms: Remember

Difficulty: 1 Easy Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.

Topic Area: Value Chain

2. Administrative functions are not included as part of the value chain because they are implicitly included in every business function. TRUE

Administrative expenses are not included as part of the value chain because they are included instead in every business function of the value chain.

AACSB: Analytic




3. Under the value chain concept, instead of perceiving whether individual activities in the chain add value, customers only consider the overall utility of the goods or services they purchase. FALSE

Under the value chain concept, the value-added activities are those that the customer perceives as adding utility to the goods or services they purchase.

AACSB: Analytic


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AICPA BB: Industry Blooms: Understand Difficulty: 2 Medium

Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations. Topic Area: Value Chain

4. A cost driver is a factor that causes costs. TRUE

A cost driver is a factor that causes costs.

AACSB: Analytic

AICPA FN: Measurement Blooms: Understand

Difficulty: 1 Easy Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in

organizations. Topic Area: Costs for Decision Making

5. A cost can be considered a differential cost for one particular course of action but not for another course of action. TRUE

A differential cost is a cost that changes in response to a particular course of action. A cost may change in response to one course of action but not in response to a different course of action.

AACSB: Analytic

AICPA FN: Measurement Blooms: Remember



6. A responsibility center can be a department, division, or segment, but not a subsidiary of the parent company. FALSE

This statement is false. A responsibility center is a specific unit of an organization assigned to a manager who is held accountable for its operations and resources. As such, a department, division, segment, or subsidiary could be considered a responsibility center.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Remember Difficulty: 2 Medium


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Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.

Topic Area: Costs for Control and Evaluation

7. It is important that the manager assigned to lead a responsibility center be held accountable for its operations. TRUE

Responsibility does not work without accountability.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Remember


organizations. Topic Area: Costs for Control and Evaluation

8. Budgeting is primarily used to determine year-end bonuses based on managerial and organizational performance. FALSE

Budgeting is used primarily for planning. A budget is a financial plan of the revenues and resources needed to carry out activities and meet financial goals. Budgeting helps managers decide whether their goals can be achieved and, if not, what modifications are necessary.

AACSB: Analytic




9. Managers are usually responsible for the revenues needed to achieve the targets set during the budgeting process, but not the resources consumed to achieve those targets. FALSE

Usually, managers are responsible for both the revenues and resources needed to carry out activities and meet financial goals.

AACSB: Analytic




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10. Cost data can be used for one managerial decision but not for another managerial decision. TRUE

One principle of cost accounting is that different decisions often require different cost data.

AACSB: Analytic



organizations. Topic Area: Different Data for Different Decisions

11. Financial accounting information is designed for decision-makers who are directly involved in the daily management of the firm. FALSE

Financial accounting is designed for external parties; cost accounting is designed for managers.

AACSB: Analytic


Difficulty: 1 Easy Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.

Topic Area: Financial Accounting

12. It is more important for financial accounting information to be comparable between firms than to be useful for managerial decision-making. TRUE

Important criteria for financial accounting include comparability and decision relevance; decision relevance and timeliness are the important criteria for cost accounting.

AACSB: Analytic

AICPA FN: Reporting Blooms: Remember

Difficulty: 3 Hard Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.



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13. Cost accounting information developed for managers to use in making decisions must comply with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). FALSE

In contrast to cost data for financial reporting to shareholders, cost data for managerial use (that is, within the organization) need not comply with GAAP or IFRS.

AACSB: Analytic

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information. Topic Area: Cost Accounting, GAAP, and IFRS

14. Cost accounting information can be used by managers to defraud customers, creditors, and owners. TRUE

The design of the cost accounting system has the potential to be misused to defraud customers, employees, or shareholders.

AACSB: Analytic


Difficulty: 1 Easy Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face

in your career. Topic Area: Ethical Issues for Accountants

15. Benchmarking is a continuous process of measuring a company's products, services, or activities against competitors' performance. TRUE

This is the definition of benchmarking.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Understand

Difficulty: 1 Easy Learning Objective: 01-04 Identify current trends in cost accounting.

Topic Area: Cost Accounting in Purchasing


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16. Activity-based costing (ABC) is a management tool that focuses on the continuous improvement of all dimensions of a business. FALSE

ABC is a costing method that assigns costs to activities and then assigns them to products based on the products' consumption of activities.

AACSB: Analytic



Topic Area: Cost Accounting in Design

17. Customer satisfaction is an example of a non-financial performance measure. TRUE

Very few customer satisfaction measures are financial in nature.

AACSB: Analytic

AICPA BB: Marketing Blooms: Understand


Topic Area: Cost Accounting in Customer Service

18. Managers face ethical situations on a daily basis, while accountants face them infrequently. FALSE

Professional accountants, managers, and business owners face ethical situations on an everyday basis.

AACSB: Ethics


Difficulty: 1 Easy Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face

in your career. Topic Area: What Makes Ethics So Important?


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19. A person who makes unethical decisions in their personal life is likely to make unethical decisions in their professional life. TRUE

Ethics are a result of an internal moral compass.

AACSB: Ethics

AICPA BB: Critical Thinking Blooms: Apply

Difficulty: 3 Hard Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face


20. Ethical behavior depends more on a firm's code of conduct than the individual's personal beliefs. FALSE

Codes of conduct look good on paper, but ultimately much of ethical behavior comes from an individual's personal beliefs.

AACSB: Ethics


Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

Topic Area: What Makes Ethics So Important?

21. The Value chain is comprised of the activities that take place during the production process. FALSE

The Value chain comprises activities from research and development through the production process to customer service.

AACSB: Reflective Thinking





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22. Cost accounting plays a significant role in management decision making. TRUE

Cost accounting provides the primary information from which to make decisions.

AACSB: Analytic



Topic Area: Cost Accounting

23. Cost accounting provides information only for cost accounting purposes. FALSE

Although it is designed for decision makers, cost accounting is commonly used in financial accounting information.

AACSB: Reflective Thinking AICPA BB: Critical Thinking

Blooms: Remember Difficulty: 1 Easy

Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information. Topic Area: Cost Accounting

24. Cost accounting is broader in scope than financial accounting. TRUE

Cost accounting is broader in scope than financial accounting.




25. Financial accounting receives information only from cost accounting activity. FALSE

Financial accounting receives information from other areas as well as from cost accounting activity.



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Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information. Topic Area: Financial Accounting

26. Financial accounting provides financial and nonfinancial information that helps managers in the decision making process. FALSE

Cost accounting provides financial and nonfinancial information that helps managers in the decision making process.




27. A value chain consists of the major subassemblies that add value to a product. FALSE

A value chain is a set of activities that transforms raw resources into the goods and services end users purchase and consume.





28. The lean thinking model focuses on reducing defects to as close to zero as possible. FALSE

Lean is about making cost-effective changes to products and services along the value chain.


Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Research and Development (R&D)


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Mult iple Choice Questions

29. The set of activities that transforms raw resources into the goods and services of an organization is called: A. Value chain.

B. Supply chain.

C. Demand chain.

D. Cost-benefit analysis.

This is the definition of the value chain.

AACSB: Analytic




30. Which of the following activities would not be considered a value-added activity? A. Production

B. Marketing

C. Accounting

D. Distribution

Accounting for something does not add value.

AACSB: Analytic

AICPA BB: Industry Blooms: Remember Difficulty: 2 Medium



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31. Which of the following statements is false? A. In essence, the value chain and the supply chain are similar; each creates something for

which the customer is willing to pay.

B. Accounting systems are important because they provide all the information for decisions commonly made by managers.

C. The supply or distribution chain is a linked set of organizations that exchange goods and services in combination to provide a final product or service to the customer.

D. Eliminating nonvalue-added activities always reduces costs without affecting the value of the product to customers.

The accounting system does not provide ALL of the information needed.

AACSB: Analytic

AICPA BB: Industry Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations. Topic Area: Supply Chain and Distribution Chain

32. Managers do not make decisions about future events based on: A. Perfect information.

B. Estimated information.

C. Actual information.

D. Financial information.

Perfect information is never available, there is always some uncertainty.

AACSB: Analytic

AICPA BB: Resource Management Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information. Topic Area: Customers of Cost Accounting


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33. Which of the following is a nonvalue-added activity? A. Product design

B. Customer service

C. Research and development

D. Rework of defective items

Performing a task correctly adds value; correcting mistakes does not.

AACSB: Analytic



Topic Area: Finding and Eliminating Activities That Don't Add Value

34. (CMA adapted) An accounting system that collects financial and operating data on the basis of the underlying nature and extent of cost drivers is A. full-absorption costing.

B. activity-based costing.

C. variable costing.

D. benchmarking.

The key term is "cost drivers" making the answer activity-based costing.

AACSB: Analytic





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35. (CMA adapted) Cost drivers are A. activities that cause costs to increase as the activity increases.

B. accounting techniques and practices used to control costs.

C. accounting reimbursements used to evaluate whether performance is proceeding according to plan.

D. a mechanical basis, such as machine hours, computer time, or factory square footage, used to assign costs to activities.

This is the definition of a cost driver.

AACSB: Analytic




36. During 2013, the JKL Restaurant had sales revenues and food costs of $800,000 and $600,000, respectively. During 2014, JKL plans to introduce a new menu item that is expected to increase sales revenues by $100,000 and food costs by $40,000. Assuming no changes are expected for the other food items, operating profits for 2013 are expected to increase by A. $260,000.

B. $100,000.

C. $60,000.

D. $40,000.

Increase in operating profits is $100,000 - $40,000 = $60,000.

AACSB: Analytic

AICPA FN: Measurement Blooms: Apply




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37. (CMA adapted) The process of creating a formal plan and translating goals into a quantitative format is referred to as A. budgeting.

B. benchmarking.

C. cost-benefit analysis.

D. value-added analysis.

E. activity-based costing.

This is the definition of budgeting.

AACSB: Analytic

AICPA BB: Resource Management Blooms: Remember



38. The field of accounting that depends on generally accepted accounting principles (GAAP) is called A. cost accounting.

B. financial accounting.

C. managerial accounting.

D. responsibility accounting.

E. international accounting.

Cost, managerial, and responsibility accounting do not depend on GAAP, and international accounting is based on IFRS.

AACSB: Analytic



Topic Area: Cost Accounting, GAAP, and IFRS


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39. Which field of accounting emphasizes relevancy over comparability? A. Cost accounting

B. Financial accounting

C. Responsibility accounting

D. International accounting

This is a fundamental concept of cost accounting.

AACSB: Analytic




40. The just-in-time (JIT) method of production focuses on A. increasing sales revenue.

B. reducing inventories.

C. increasing customer service.

D. reducing operating expenses.

E. increasing product quality.

The focus is on reducing inventories, the other items are all results or outcomes.

AACSB: Analytic



Topic Area: Cost Accounting in Production

41. (CIA adapted) The primary reason for adopting total quality management (TQM) is to achieve A. reduced delivery time.

B. reduced delivery charges.

C. greater customer satisfaction.

D. greater employee participation.

E. better managerial decisions.

TQM focuses on the customer.

AACSB: Analytic


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42. According to the Institute of Management Accountants (IMA), the final step in resolving an ethical dilemma is to A. resign from the organization.





Resigning is a last step, the other four choices attempt to resolve the dilemma.

AACSB: Ethics

AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium



43. According to the Institute of Management Accountants (IMA), the first step in resolving an ethical dilemma is to A. resign from the organization.





It is best to deal with the immediate problem before bringing in outsiders.

AACSB: Ethics



Topic Area: IMA Code of Ethics


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44. Which of the following is not one of the basic standards of the Institute of Management Accountants (IMA) Code of Ethics? A. Competence

B. Confidentiality

C. Honesty

D. Integrity

E. Credibility

The other options are basic standards of the IMA Code of Ethics. Honesty is not.

AACSB: Ethics




45. Which of the following is not one of the overarching ethical principles of the Institute of Management Accountants (IMA) Code of Ethics? A. Competence

B. Responsibility

C. Honesty

D. Objectivity

E. Fairness

Competence is not one of the overarching ethical principles of the IMA Code of Ethics.

AACSB: Ethics





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46. The financial plan of the revenues and resources needed to carry out activities and meet financial goals is called A. performance measure.

B. benchmarking.

C. budgeting.


E. lean accounting.

The statement made is the definition of budgeting.

AACSB: Analytic

AICPA BB: Resource Management Blooms: Understand Difficulty: 2 Medium



47. The cost accounting system that minimizes wasteful or unnecessary transaction processes is A. performance measure.

B. benchmarking.

C. budgeting.


E. lean accounting.

The statement made is the definition of lean accounting.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Production


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48. Continual process of measuring a company's own products, services or activities against competitors' performance is A. performance measure.

B. benchmarking.

C. budgeting.


E. lean accounting.

The statement made is the definition of benchmarking.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Purchasing

49. The costing method that first assigns costs to activities and then assigns them to products based on the products' consumption of activities is called A. lean accounting.



D. budgeting.

E. outsourcing.

This method is a basic concept of ABC.

AACSB: Analytic

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium

Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Design


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50. Having one or more of the firms' activities performed by another firm or individual in the supply or distribution chain is called A. lean accounting.



D. budgeting.

E. outsourcing

The statement is a definition of outsourcing.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Distribution

51. The system that identifies the costs of producing low-quality items is called A. customer relationship management.



D. cost of quality.


The statement is a definition of cost of quality.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Customer Service


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52. The system that allows firms to target profitable customers by assessing customer revenue and costs is called A. customer relationship management.



D. cost of quality.


The statement is a definition of CRM.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Cost Accounting in Marketing

53. Information technology that links the various processes of the company into a single comprehensive information system is called A. customer relationship management.



D. cost of quality.


The statement is a definition of ERP.

AACSB: Analytic

AICPA BB: Leveraging Technology Blooms: Understand Difficulty: 2 Medium

Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Enterprise Resource Planning


1-71

54. A management method by which the organization seeks to excel on all dimensions of quality is called A. customer relationship management.



D. cost of quality.


The key words are "management method" and "all dimensions of quality."

AACSB: Analytic



55. Which of the following is not a key financial manager in an organization? A. Chief financial officer

B. Treasurer

C. External auditor

D. Controller

E. Cost accountant

The external auditor is not a financial manager in an organization.

AACSB: Analytic


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Key Financial Players in the Organization


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56. Which of the following is not normally considered part of the value chain? A. Research and development

B. Purchasing

C. Administration

D. Distribution

E. Customer service

Administration is imbedded in all of the business function; it is not a separate function of the value chain.

AACSB: Analytic




57. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while costs were $750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in costs. Assuming no changes are expected for the other services, operating profits are expected to increase by A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.

Increase in operating profit is $150,000 - $60,000 = $90,000.

AACSB: Analytic





1-73

58. In 2013, the MoreForLess Company had revenues of $2,000,000 and costs of $1,500,000. During 2014, MoreForLess will be introducing a new product line that is expected to increase sales revenue by $200,000 and costs by $160,000. Assuming no changes are expected for the other products, the operating profits are expected to increase by A. $540,000.

B. $200,000.

C. $160,000.

D. $40,000.

Increase in operating profit is $200,000 - $160,000 = $40,000.

AACSB: Analytic




59. Moving of inventory is an example of a(n) A. cost-benefit analysis.

B. value-added activity.

C. activity-based cost.

D. nonvalue-added activity.

Producing product adds value, moving it around does not add value.

AACSB: Analytic



organizations. Topic Area: Finding and Eliminating Activities That Don't Add Value


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60. Costs that change in response to a particular course of action are A. differential costs.

B. cost-benefit analysis.

C. activity-based costs

D. cost drivers.

This statement is a definition of differential costs.

AACSB: Analytic




61. Which of the following activities would not be included in the value chain of a manufacturing company? A. Research and Development

B. Customer Service

C. Design

D. Accounting

Accounting is not a separate item in the value chain, while the other choices are.


Blooms: Understand Difficulty: 1 Easy



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62. A firm's replies to customers' questions via email would be an example of which element of the value chain? A. Customer Service

B. Marketing

C. Design

D. Supply

The statement is an example of customer service.





63. The delivery of products or services to customers is an example of which element in the value chain? A. Production

B. Design

C. Marketing

D. Distribution

The statement is an example of distribution.






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64. The extended value chain: A. is a set of consecutive operations or processes that begins with purchasing resources and

ends with providing products or services that customers value.

B. is a related set of tasks, manual or automated, that transforms inputs into identifiable outputs.

C. incorporates how companies obtain their resources and distribute their products and services, using the services of other organizations.

D. is a technique for identifying opportunities for improvement and measuring the effects of proposed improvements by comparing both the costs and benefits of a proposal.

The extended value chain reaches to suppliers and customer; activities outside of the firm itself.


Blooms: Understand Difficulty: 2 Medium


65. Manufacturing firms use the value chain to take steps to improve the overall profitability of the firm by: A. placing greater emphasis on the value chain.

B. moving to an emphasis on upstream activities in the value chain.

C. moving to an emphasis on downstream activities in the value chain.

D. finding low-cost manufacturing locations.

Causing financial changes within the value chain is the focus of the activity.





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66. During which step of the value chain process will a manufacturing company determine whether or not it has added utility? A. The Design component

B. The Purchasing process

C. The Production activity

D. Added utility occurs in all steps.

A basic tenant of value chains is to create utility at all steps or outsource those that don't add utility to the firm.

AACSB: Analytic



67. Which of the following types of organizations can most benefit from the implementation of value chain? A. Service firms

B. Not-for-profit organizations

C. Manufacturing firm.

D. All types of organizations can benefit from the implementation of value chain

There are no restrictions as to what type of organization can benefit from implementation of value chain.

AACSB: Analytic




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68. Which of the following statements concerning the value chain is false? A. The goal of a value chain is to find areas where a company can either add value or reduce

cost.

B. The value chain focuses on the entire production process, as well as the sale of the product and service after the sale.

C. If a company cannot compete in a specific area of the value chain, it might outsource that portion of the value chain to another entity which can perform it better.

D. Successful firms are ones that operate within the entire value chain, thereby overseeing every aspect of the value chain for the customer.

A "total value chain focus" ensures the utility of each value chain function.

AACSB: Analytic


Difficulty: 3 Hard Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.


69. Which of the following could be considered part of the value chain in a service firm? A. Inspection of product

B. Advertising

C. Raw materials

D. Distribution

The other three alternatives describe an activity with a "physical" product.

AACSB: Analytic





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70. Place the four components in the order they appear along the value chain: A = Customer service; B = Design; C = Distribution; and D = Production. A. ABDC

B. ACDB

C. BDCA

D. BADC

This is the correct order of the given components in the value chain.




71. The value chain is the order of business components in which: A. value is deducted from the products or services of a business.

B. value is proportionally added to the products or services of a business.

C. products or services are evaluated according to their value to the distribution chain.

D. utility is added to the products or services of an organization.

The addition of utility is a focus of the definition for a value chain.




72. Cost accounting A. provides information on material usage.

B. provides information on the profitability of customer orders.

C. provides information on the efficiency of service department labor.

D. All of these.

Cost accounting provides all of the alternatives listed.


Blooms: Understand


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Difficulty: 2 Medium Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.


73. Financial accounting A. focuses on the future.

B. must comply with GAAP (generally accepted accounting principles).

C. reports include detailed information on the various operating segments of the business.

D. is prepared for the use of management.

Financial accounting must comply with GAAP. The other choices are characteristics of cost accounting.




74. The individual who would most likely use only financial accounting information in making decisions is a A. vice president of marketing.

B. factory supervisor.

C. department manager.

D. company stockholder.

Financial accounting information is available to this group, while the other alternative are available to those inside the organization.

AACSB: Analytic





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75. The financial accounting system is the primary source of information for A. decision making on the factory floor.

B. improving the performance level of customer service.

C. planning the budget for next year.

D. preparing the income statement for stockholders.

The statement specifically relates to preparing the income statement for stockholders. The other function are internal and have to do with the functioning of the cost accounting system.




76. Cost accounting provides all of the following with the exception of A. pricing information from marketing studies.

B. nonfinancial information regarding the cost of operational efficiencies.

C. financial information on the cost of acquiring resources.

D. information for managerial accounting and financial accounting.

Pricing information from marketing studies comes from outside the firm whereas the other options are generated within the firm.




77. The primary objective of financial accounting is A. profitability analysis.

B. providing information for management decision making.

C. cost planning and cost controls.

D. reporting to investors, creditors, and government authorities.

The function of outside reporting is a primary objective of financial accounting.



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78. Financial accounting provides a historical perspective, while cost accounting emphasizes A. reporting to stockholders.

B. a current perspective.

C. the future.

D. past transactions.

Future focus is a basic function of cost accounting. The other options all support financial accounting.




79. Which of the following does not represent a main focus of cost management information? A. Internal auditing and control

B. Performance measurement

C. Planning and decision making

D. Preparation of financial statements

Internal audit and control focuses on the end product of financial reporting.


Blooms: Analyze Difficulty: 2 Medium



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As the cost accountant, which single note to the above financial results is most appropriate in the report to management? A. The departmental manager is performing to expectations because budgeted income equals

actual income.

B. Revenues are above budget and a bonus based on this increase should be considered.

C. Costs as a percentage of revenues are above budget and a further scrutiny of the results might be appropriate.

D. Costs are 17.5% above budget and the department manager's position should be critically evaluated by senior management.

If revenue is higher, then profits should be higher, unless there is a problem with costs.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Evaluate Difficulty: 3 Hard




1-84


Assume that the budget was based on the sale of 104 surfboards at $500 each and the actual results reflect the sale of 104 surfboards. What is the most appropriate conclusion in the report to management? A. If costs as a percentage of revenues had remained at the budgeted level, net income would

have declined.

B. If costs as a percentage of revenues remain at the actual level any increase in revenues would probably be matched by a decrease in net income.

C. If costs as a percentage of revenues had remained at the budgeted level, net income would be $985 above budget.

D. If costs as a percentage of revenues had remained at the budgeted levels, net income would be $4,000 above budget.

Costs were 87.69% at $52,000 in sales; at $60,000, costs should be $52,615 not $53,600 for a difference of $985.

AACSB: Analytic





1-85


Assume that an additional 10 surfboards were sold at the regular price, during additional store opening hours. What is the most appropriate conclusion in the report to management? A. The budget should be updated to take into account the change.

B. The additional hours were needed, as net income increased.

C. An analysis of the differential costs of the additional store hours should be undertaken prior to drawing a conclusion as to the success of the change.

D. All of these.

Give the financial information.

AACSB: Analytic





1-86

83. Lucena Corporation purchased a machine 7 years ago for $339,000 when it launched product X05K. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 360 machine costing $353,000 or by a new model 280 machine costing $332,000. Management has decided to buy the model 280 machine. It has less capacity than the model 360 machine, but its capacity is sufficient to continue making product X05K. Management also considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If that were done, the $332,000 invested in the new machine could instead have been invested in a project that would have returned a total of $426,000. In making the decision to buy the model 280 machine rather than the model 360 machine, the differential cost was: A. $21,000.

B. $87,000.

C. $7,000.

D. $14,000.

Model 360 cost ($353,000) - Model 280 cost ($332,000) = Differential cost ($21,000).

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Decision Making

Blooms: Evaluate Difficulty: 2 Medium


Topic Area: Costs for Decision Making

84. A responsibility center has a manager assigned to lead the unit, taking responsibility for the unit's operations and resources, and the unit may be called a A. department.

B. division.

C. segment.

D. All of these.

All three terms are considered responsibility centers.

AACSB: Analytic

AICPA FN: Reporting Blooms: Understand




1-87

85. Al's Brake Shop had sales revenues and operating costs in 2014 of $650,000 and $525,000, respectively. In 2015, Al's plans to expand the services it provides to customers to include lubrication services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing brake business, operating profits would be expected to increase during 2015 by A. $125,000.

B. $85,000.

C. $160,000.

D. $35,000.

Revenues ($85,000) - Operating costs ($50,000) = additional operating profit ($35,000).

AACSB: Analytic




86. Al's Brake Shop had sales revenues and operating costs in 2014 of $650,000 and $525,000, respectively. In 2015, Al's plans to expand the services it provides to customers to include lubrication services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing brake business, what is the amount of operating profits that are expected be earned in 2015? A. $125,000

B. $85,000

C. $160,000

D. $35,000

Total Revenues ($650,000 + $85,000) - Total Operating costs ($525,000 + $50,000) = Total operating profit = $160,000.

AACSB: Analytic





1-88

87. The goals and objectives of establishing budgeting in an organization include all of the following except: A. the ability to decide whether goals can be achieved.

B. the resources needed to carry out its tasks.

C. anticipated revenues to be generated.

D. the consistent application of generally accepted accounting principles.

Consistent application of GAAP has nothing to do with goals and objectives of establishing budgets.


Blooms: Understand Difficulty: 1 Easy



88. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while operating costs were $750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential operating costs for 2014 will be A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.

The additional operating costs are the differential amount of $60,000.

AACSB: Analytic





1-89

89. In 2013, the Turnkey Company had consulting revenues of $1,000,000 while operating costs were $750,000. In 2014, Turnkey will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential revenue for 2014 will be A. $250,000.

B. $150,000.

C. $90,000.

D. $60,000.

The additional revenues are the differential amount of $105,000.

AACSB: Analytic





Are the materials costs and processing costs differential in the choice between alternatives A and B? (Ignore the building costs and equipment rental in this question.) A. Neither materials costs nor processing costs are differential.

B. Both materials costs and processing costs are differential.

C. Only processing costs are differential.

D. Only materials costs are differential.

Both material costs and processing costs are differential.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Evaluate Difficulty: 1 Easy



1-90



If only the differential costs of the two decisions are considered, the total cost of Alternative B is A. $161,000.

B. $131,500.

C. $59,000.

D. $102,000.

All of the costs except equipment rental are differential ($22,000 + $21,000 + $16,000= $59,000).

AACSB: Analytic





1-91

92. Two alternatives, identified A and B, are under consideration at Hayden Corporation. Costs associated with the alternatives are listed below.

Are the materials costs and processing costs differential in the choice between alternatives A and B? (Ignore the building costs and equipment rental in this question.) A. Both materials costs and processing costs are differential

B. Only materials costs are differential

C. Only processing costs are differential

D. Neither materials costs nor processing costs are differential

Both material costs and processing costs are differential.

AACSB: Analytic





1-92

93. Two alternatives, identified X and Y, are under consideration at Hayden Corporation. Costs associated with the alternatives are listed below.

What is the differential cost of Alternative Y over Alternative X? A. $140,000

B. $123,000

C. $34,000

D. $106,000

Both material costs and processing costs are differential, $12,000 + $22,000 = $34,000.

AACSB: Analytic




94. Which of the following cost accounting methods does not help firms keep the supply chain "lean" and add value throughout the chain? A. Target costing

B. Activity-based costing

C. Throughput-costing

D. Performance measures

Target costing, activity-based costing, and performance measures help firms keep the supply chain lean.


AICPA BB: Industry Blooms: Understand


Topic Area: Costs Accounting for Purchasing


1-93

95. An Enterprise Resource Planning System can best be described as A. a collection of programs that use a variety of unconnected databases.

B. a single database that collects data and feeds it into applications that support each of the company's business activities, such as purchases, production, distribution, and sales.

C. a database that is primarily used by a purchasing department to determine the correct amount of a particular supply item to purchase.

D. a sophisticated means of linking two or more companies to facilitate their planning processes.

This statement is a definition of an Enterprise Resource Planning System.

AACSB: Technology


Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Enterprise Resource Planning

96. The approaches and activities of managers in short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services are known as A. value chain management.

B. enterprise resource planning.

C. cost management.

D. customer value management.

This statement is the objective of value chain management.

AACSB: Technology




1-94

97. R&D, production, and customer service are business functions that are all included as part of A. the value chain.

B. benchmarking.

C. marketing.

D. the supply chain.

These activities are all found in the value chain.

AACSB: Analytic

AICPA BB: Industry Blooms: Understand



98. Cost leadership can improve on execution through A. improved automation and a higher output of products.

B. benchmarking and total quality management.

C. cost cutting and downsizing of personnel.

D. improvements in product development.

Benchmarking and total quality management are continuous improvement topics and improve cost leadership.

AACSB: Analytic



99. All of the following are examples of total quality management practices except A. redesign of a product to reduce its parts by 50 percent.




The other three options focus on specific practices, whereas this option has no stated objective.

AACSB: Analytic


1-95



100. Which area(s) of a business can be improved by using a just-in-time (JIT) system? A. Production, purchasing, and delivery

B. Production only

C. Purchasing only

D. Production and purchasing only

All three areas can be improved by using a JIT system.

AACSB: Analytic



101. The ________ is primarily responsible for cost accounting and financial accounting. A. COO (Chief Operating Officer)

B. CIO (Chief Information Officer)

C. treasurer

D. controller

The controller is primarily responsible for cost accounting and financial accounting.

AACSB: Analytic



Topic Area: Creating Value in the Organization


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102. All of the following individuals would report to the Chief Financial Officer (CFO) except the A. controller.

B. internal auditor.

C. production manager.

D. treasurer.

All report to the CFO except for the production manager, who reports to the VP of Manufacturing.



Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Creating Value in the Organization

103. Examples of the controller's functions include all except A. cost accounting policies.

B. budgeting.

C. investor relations.

D. general ledger.

All are example of the controller's functions except for investor relations.



Learning Objective: 01-04 Identify current trends in cost accounting. Topic Area: Creating Value in the Organization

104. Cost accounting is an integral part of the ________ function in an organization. A. treasurer's

B. controller's

C. internal auditor's

D. president's

Cost accounting is an integral part of the controller's function.


Blooms: Remember


1-97


Topic Area: Creating Value in the Organization

105. All of the following actions enhance the new focus on making cost accounting information more relevant in helping a firm achieve strategic goals except A. increasing emphasis on the management accountant as a business partner.

B. increasing emphasis on external financial reporting.

C. decreasing emphasis on financial statement inventory cost valuation.

D. increasing emphasis on timely and useful information.

The three other options enhance making cost accounting information more relevant.

AACSB: Analytic


Difficulty: 3 Hard Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.


106. All of the following are examples of total quality management practices except A. redesign of a product to reduce its parts by 50 percent.




This is not an example of TQM practices.

AACSB: Analytic

AICPA BB: Resource Management Blooms: Understand

Difficulty: 3 Hard Learning Objective: 01-04 Identify current trends in cost accounting.



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107. The Institute of Management Accountants' (IMA) standards of ethical conduct for management accountants includes the elements of A. competence, confidentiality, integrity, and relevance.

B. competence, confidentiality, integrity, and credibility.

C. competence, confidentiality, independence, and objectivity.

D. competence, accuracy, integrity, and independence.

These four elements are included in the IMA's standard of ethical conduct.

AACSB: Ethics




108. According to the IMA Code of Ethics, what should a management accountant do if a significant ethical situation can't be resolved? A. The accountant should confront the guilty party and demand the unethical action be

stopped.

B. The accountant should try to rationalize and understand the position of the other party.

C. The accountant should say nothing about the matter until he or she has retired.

D. The accountant should first discuss the matter with the immediate supervisor.

This is a step that the accountant should take.

AACSB: Ethics



Topic Area: Ethics


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109. With the enactment of the Sarbanes-Oxley Act of 2002, all public companies are now required by the SEC to disclose whether or not the company has A. an audit committee.

B. human resources guidelines.

C. a code of ethics.

D. a management compensation plan.

This is a requirement under the Sarbanes-Oxley Act of 2002.

AACSB: Ethics



Topic Area: Sarbanes-Oxley Act of 2002 and Ethics

110. Which of the following is not an ethical standard of competence in the Standards of Ethical Conduct for Management Accountants? A. Development of professional knowledge and skills

B. Preparation of complete and clear reports and recommendations of relevant and reliable information

C. Refraining from engaging in activities that would discredit the profession

D. Performing professional duties in accordance with relevant laws, regulations and technical standards

This is not part of the ethical standard of competence.

AACSB: Ethics


Difficulty: 3 Hard Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face

in your career. Topic Area: IMA Code of Ethics


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111. The Sarbanes Oxley Act of 2002 requires an effective internal control system for publicly owned firms. Therefore, with regards to strategic investment decisions, it is important that management consider including A. internal audits of strategic decisions.

B. a code of ethics.

C. a system of preparing and reporting on investment decision.

D. All of these.

All of the items listed here should be included in an effective internal control system.

AACSB: Ethics





112. Where there is a lack of good performance measures, it is difficult to motivate managers by using A. performance-based incentives.

B. monetary rewards.

C. compensation.

D. rewards for products.

Good performance measures are necessary in implementing performance-based incentives.

AACSB: Ethics






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113. Which of the following is a true statement regarding performance evaluation? A. Managers should be evaluated on those things over which they have influence.

B. Managers should be evaluated on the performance of the entire organization.

C. Sales personnel do not have complete control over the level of sales.

D. Managers should not be evaluated on those things over which they have influence, if they do not have complete control over them.

This is the only measure listed here on which performance should be evaluated.

AACSB: Ethics





Essay Questions


1-102

114. Honda incurs many types of costs in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.

AACSB: Analytic





1-103

115. Northern King is an integrated provider of genetically engineered corn. Many types of costs are incurred in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.

AACSB: Analytic





1-104

116. Cindy's Limo Service provides transportation services in and around Middleville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $275,000 per year. The total cost to lease additional delivery vehicles from the local dealer is $60,000 per year. The present manager will continue to supervise all services. However, labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the package delivery service is added.

a. Prepare a report of the differential costs and revenues if the delivery service is added. b. Should management start up the delivery service? Explain your answer.

a. b. The decision to expand and offer the delivery service results in differential profits of $55,000, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The manager's salary did not change, so it was not included.


1-105

AACSB: Analytic

AICPA FN: Decision Making Blooms: Analyze

Difficulty: 2 Medium Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in



1-106

117. Looman Inc. is a management consulting firm that specializes in management training programs. In-Line Manufacturing Inc. has approached Looman to contract for management training for a one-year period. Last year's income statement for Looman is as follows:

To satisfy the In-Line contract, another part-time trainer will need to be hired at $42,000. Supplies will increase by 12% and other costs will increase by 15%. In addition, new equipment will need to be leased at a cost of $2,500. a. What are the differential costs that would be incurred if the In-Line contract is signed? b. If In-Line will pay $55,000 for one year, should Looman accept the contract? Explain your answer.

a. Differential costs incurred if the contract is signed:

b. Differential revenues of $55,000 will exceed the differential costs of $49,492. As a result, Looman will earn an additional $5,508 in operating profit if it accepts the contract.

AACSB: Analytic





1-107

118. The Anderson Company reported the following results for the manufacture and sale of one of its products known as Bangers during the most recent year.

The Anderson Company is trying to determine whether or not to discontinue the manufacture and sale of Bangers. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The building costs represent the costs of production facilities and equipment that the Bangers product shares with other products produced by Anderson. If the Bangers product were dropped, there would be no change in the building costs of the company. Management has determined that discontinuing the manufacture and sale of Bangers will have no effect on the company's other product lines. Determine the change in operating profits that will happen if the manufacture and sale of Bangers is discontinued.

Although the company's net operating profits would seem to increase by $55,000 if the manufacture and sale of Bangers were discontinued, the building costs, which amount to $145,000, would continue regardless. As a result, operating profits will actually decrease if the manufacture and sale of Bangers is discontinued as shown below. (Note that the decrease in revenues that would result will decrease operating profits and, as such, it is shown as a negative number below. The cost savings listed below would increase operating profits, which is why these amounts are shown as positive amounts below.)

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Analyze




1-108

119. The management of Godzilla Corporation is considering dropping product XYZ123. Data from the company's accounting system appear below:

All building expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the building expenses and $48,000 of the selling and administrative expenses will not be incurred if product XYZ123 is discontinued. a. According to the company's accounting system, what are the operating profits earned by product XYZ123? b. What would be the impact on the company's overall operating profits if product XYZ123 is dropped? Should the product be dropped?

a. Operating profits (losses) earned by product XYZ123:

b. Impact on company's overall operating profits if product XYZ123 is dropped:

Overall operating profits would decrease by $45,000 if product R10C were dropped. Therefore, the product should not be dropped.

AACSB: Analytic





1-109

120. The management of Mystical Corporation has been concerned for some time with the financial performance of its product E35R and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:

In the company's accounting system all building expenses of the company are fully allocated to products. Further investigation has revealed that $95,000 of the building expenses and $85,000 of the selling and administrative expenses will not be incurred if product E35R is discontinued. a. According to the company's accounting system, what are the operating profits (losses) earned by productE35R? b. What would be the effect on the company's overall operating profits if product E35R is dropped?

a. Operating profits (losses) earned by product E35R:

b. Impact on company's overall operating profits if product E35R is dropped:

Overall operating profits would decrease by $177,000 if product E35R were dropped. Therefore, the product should not be dropped.

AACSB: Analytic



organizations.


1-110


121. Place the letter of the appropriate element of an organization's value chain in Column 2 in the blank next to each operation in Column 1.


Blooms: Remember Difficulty: 2 Medium



1-111

122. 131 Flavors is a local ice cream shop. The company currently is showing an operating loss, as evidenced by the income statement below:

The President of the company is considering adding sandwiches to the menu. Sales will be expected to increase by $60,000. The cost of sandwich supplies would be $30,000. Labor costs would increase 40% and other costs 10%. The current manager will continue to manage the operation. a. Prepare a quantitative analysis of the decision to add sandwiches to the menu. b. What qualitative considerations should the company consider in this decision?

a.

b. Qualitative considerations should include the impact on the current manager's morale with the large increase in responsibility, the ability of the company to successfully integrate the new menu and the response of customers to the addition of sandwiches in an ice cream shop.

AACSB: Analytic




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123. The Callahan family currently lives in a suburb of a major city. They have a lovely home close to major routes of transportation. Both Mr. and Mrs. Callahan have convenient commutes of 30 minutes or less. Because the school system in their town does not have a quality reputation, they currently send their daughter to private school, conveniently located less than one mile from their home. The family's current monthly living expenses are listed below:

The Callahans are considering moving to a town approximately 20 minutes away. Because of the desirability of the local schools and strict zoning, housing is very expensive in this town. Their daughter would attend public schools. The Facts estimate that their monthly mortgage, taxes and insurance would increase to $7,000 per month, while the cost of running automobiles would increase 20% and other utilities 10%. Mortgage interest costs are tax deductible and the Facts are in the 25% tax bracket. Assume that $700 of the increase in their monthly budget is for mortgage interest. What are the costs and benefits of moving? Which can be quantified and which cannot?

The Callahans should recognize that their total household expenses will not increase significantly. The increased mortgage will be offset by the savings on private school. In addition, since the mortgage is tax deductible and the school is not, the savings in taxes will just about offset the increased monthly costs:

Other costs and benefits are not measurable. The Callahans are assuming that their daughter will receive the same quality of education in the public school. Commuting time will increase by 40 minutes per day for both Mr. and Mrs. Callahan. The convenience of being located very close to a major route of transportation will no longer be theirs.

AACSB: Analytic



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124. Place the letter of the appropriate business function of the value chain in Column 2 in the blank next to each cost item in Column 1.

AACSB: Analytic





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125. Springfield Manufacturing produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: materials, labor, and support costs. Total support costs for January were $300 million, and were allocated to each product on the basis of labor costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Bertha, was:

a. Compute the manufacturing cost per unit for each product produced in January. b. Suppose production will be reduced to 30,000 units in February. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January; it is not necessary to calculate the exact February unit cost. Briefly explain your reasoning.

a. Unit costs for January were: ($9,000,000 + $3,000,000 + $8,500,000) ÷ 40,000 = $512.50 per unit. b. Unit costs should be higher in February if only 30,000 units are to be produced. Indirect manufacturing costs most likely include both fixed and variable components. Since fewer units are expected to be produced in February, total fixed costs will be spread over fewer units. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production.

AACSB: Analytic





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126. The list of representative cost drivers in the right column below are randomized with respect to the list of functions in the left column. That is, they do not match.

Required: Match each business function with its representative cost driver.

AACSB: Analytic





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127. A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify the following for the restaurant management: a. Costs that are relevant to this decision. b. Costs that would not be differential to this decision. c. Any qualitative factors that should be considered.

For the decision of whether to update the restaurant's image: a. Relevant costs include a one-time cost of the renovation for the updated image, and a change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation. b. Costs that are not differential include replacing the menus and the carpet since they need to be replaced whether the image is updated or not. c. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer they want to attract.






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128. You have been employed as an entry-level management accountant for a little under a year. You suspect that your immediate supervisor is involved in a significant fraud involving diverting of company assets to personal use. Briefly describe the steps you might take to resolve this dilemma.

The management accountant should first consult any internal company procedures concerning the resolution of ethical issues, and make sure these procedures are followed as closely as possible. At the same time, the management accountant should make sure that the facts are accurate, and are not based on rumors or inaccurate information. If these policies do not resolve the situation, the management accountant should present the facts to the next higher managerial level. The relevant ethical issues should be clarified with an objective advisor (e.g., Institute of Management Accountants hotline). The management accountant should consider consulting with an attorney to be aware of his or her own rights and responsibilities. If all internal review procedures have still not resolved the ethical situation, the managerial accountant might have to resign and write an informative letter to an appropriate representative of the organization, and perhaps notify other parties.

AACSB: Ethics


Difficulty: 2 Medium Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face

in your career. Topic Area: Ethics

129. Healthy Dog, Inc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?

In deciding whether or not to eliminate a product, the firm should determine if costs that can be eliminated will exceed the revenues that will be lost. The firm needs to classify the costs into those costs which will be eliminated and therefore are relevant, and which costs will continue even if the product is deleted. Costs that often continue are those costs which have been allocated rather than incurred directly by the product. The firm must also look to see if any other products may be harmed by the elimination of the product. Maybe the products are complements, and loss of one sale will result in loss of another. The firm should consider whether another product's sales might increase if the product is deleted, which could be an opportunity to earn more contribution from another area. Can the firm use the space freed up for some other purpose that could generate additional inflows, which is an opportunity cost? The firm must also look at how its reputation among its customers for selling a full line of products might be damaged as a result of this decision.



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130. Comstock Mining Company mines iron ore for production into various metal products. During recent years, the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders, the company has the technology to quickly shift production from one product to another. Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.

The company can probably benefit from changing to a just-in-time system for inventory control. This would allow the company to be responsive to actual needs rather than finished goods inventory building. The advantages would be: 1. Lower inventory requirements; 2. Reductions in carrying and handling costs of inventories; 3. Reduction in risks of obsolete inventories; 4. Reduction in total manufacturing costs; and 5. Reductions in paperwork.


AICPA BB: Resource Management Blooms: Evaluate

Difficulty: 2 Medium Learning Objective: 01-04 Identify current trends in cost accounting.

Topic Area: Cost Accounting in Production


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131. JIT is a large, publicly held Corporation. The company does about 80% of its work in government contracts. All contracts use a cost plus fixed fee basis; costs of jobs are agreed upon by contract. Any overruns will result in losses to the company. The company controller, Brendan Behan CPA, CMA, is discussing two current jobs with the Job Supervisor, Ashlee Beth. Job 100 is currently coming in under budget, but due to construction problems, Job 102 is 20% over budget. Behan is considering the possibility of having employees who work on Job 102 record their time to Job 101. What are the implications of this decision?

This is clearly an unethical practice. Since the contract price is a legally binding document, JIT would first be violating a legal arrangement with the government. The company could be held liable for the excess charges. This could result in fines, interest and punitive damages; criminal and civil charges could be levied against the employees knowingly involved in these practices. The practice also misleads managers who rely on accurate cost information for pricing, cost control and other decisions. If the jobs are cost plus fixed fee, the client is paying more than he should for the work. In fact, a government indictment could have ramifications of future lost business, not only with the government, but also other potential customers. In addition, Brendan and Ashlee could be faced with the loss of their jobs and reputations. As a CPA, Brendan could further lose his professional certification by violating the Code of Ethics of the American Institute of CPAs.

AACSB: Ethics

AICPA BB: Legal Blooms: Evaluate




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132. The owner of a small retail business asks, "Why do I need cost accountants? My CPA produces financial statements, which are sufficient for me to discover my costs. Look at my Income Statement. I expect sales to increase by 10% next year, so I am planning on a 10% increase in profits. I don't need a cost accountant to tell me that."

Use your knowledge of the concept of differential costs and explain why a cost accountant would question the conclusion that a 10% increase in sales would yield a 10% increase in profit.

The primary purpose of this exercise is to challenge students to think beyond the material presented in the chapter and to write/justify their responses. Answers will vary in depth and breadth, but should mention the change in costs may not be linear, some costs are certainly fixed and others are variable, and the above changes are based on estimates of changes in the cost drivers.

AACSB: Analytic




133. Create a diagram of the value chain by putting the following components into the correct order: a) purchasing; b) marketing and sales; c) research and development; d) customer service; e) distribution; f) design; g) production.

c) research & development → f) design → a) purchasing → g) production → b) marketing and sales → e) distribution → d) customer service

AACSB: Analytic




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134. Explain the difference between a value chain, a supply chain, and a distribution chain.

The value chain is the set of activities that expand the entire transformation process from raw resources into goods or services purchased and consumed by the end users. The supply chain is the set of firms and individuals that sells goods and services to a firm. The supply chain is an input for a firm. The distribution chain is the set of firms or individuals that buy and distribute the goods from the firm. The distribution chain is the output from a firm.

AACSB: Analytic

AICPA BB: Industry Blooms: Analyze

Difficulty: 2 Medium Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.

Topic Area: Supply Chain and Distribution Chain

135. Compare financial accounting and cost accounting using the following concepts: users of the information; important criteria; who establishes or defines the system; and how to determine an accounting treatment.

AACSB: Analytic

AICPA FN: Reporting Blooms: Analyze




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136. The IMA Code of Ethics describes three basic steps a cost accountant should take when faced with an ethical conflict: Discuss, clarify, and consult. Describe each of these three steps.

Discuss the conflict with your immediate supervisor or, if the immediate supervisor is involved, the next level in authority. Clarify the relevant issues and concepts by discussions with a disinterested party. Consult with an attorney about your rights and obligations.

AACSB: Ethics

AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium


Topic Area: Ethics

137. Respond to this comment: "Since cost accountants just prepare accounting data for internal management, cost accountants do not need to be concerned with GAAP or IFRS."

Although internal accounting is concerned with decision relevance for managers, the cost accountant still needs to be informed as to the GAAP/IFRS concepts regarding recording and measuring of costs.

AACSB: Analytic

AICPA FN: Reporting Blooms: Analyze


Topic Area: Cost Accounting, GAAP, and IFRS


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138. What are characteristics of information used in decision making?

Information used in decision making must be relevant, accurate, timely, and it may be qualitative in nature. Relevant information is pertinent to a decision, i.e., it will make a difference in the decision being made. Because different managerial problems usually require different data, a difficulty is deciding what information is relevant to the situation under review. Information used in decision making must also be accurate or it will be of little use. Accurate information is precise. If cost information is imprecise because of incorrect calculations or incomplete records, the information will not be very useful. But, the information must also be relevant. Highly accurate but irrelevant data are of no value to the decision-maker. Relevant and accurate information is of value only if it is timely, that is, available in time to make a decision. In an ideal world, the best information will be relevant, accurate, and timely. However, rarely does an organization operates in an ideal environment and some compromise may be needed -- particularly between accuracy and timeliness. More accurate information will take longer to produce. There is an inverse relationship between accuracy and timeliness, and the two characteristics must be balanced as to determine what is acceptable. Decision making also involves qualitative characteristics, which are the factors in a decision problem that cannot be expressed in numerical terms. Examples could include poor employee morale, the loss of control that occurs if certain processes are outsourced, and the harm done to an organization if a manager places his or her own goals over the goals of the organization. Quantitative analysis can be used to determine the cost of qualitative factors. Weighing the quantitative and qualitative factors in making decisions is the essence of management.

AACSB: Analytic




Topic Area: Decision Making Requires Information


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139. The Finger Curl is a small but prosperous hair cutting salon. Sally Henry, the manager of the salon, has been asked by several clients if she will ever offer other "hair related" services (e.g., perm, dye, etc). After careful thought, Henry is considering expanding her offerings. However, in order to do so, she will have to hire one additional stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by 20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues from additional services are likely to be $55,000 for the next year (i.e., 2013). The Finger Curl's income statement for the most recent year is presented below. Required: a. Based on your financial analysis, should Sally Henry go ahead with the expansion? b. What other factors must Henry consider before making a final decision?

a. Based on your financial analysis, should Sally Henry go ahead with the expansion? b. What other factors must Henry consider before making a final decision?

a. The financial implications of expanding the services offered by The Finger Curl are as follows:


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Based on the financial analysis, Sally Henry should go ahead with the expansion because her profits will increase by $10,650 or 15.4%. However, the assumption underlying her decision is that she considers the estimates to be reliable. b. Other factors that Henry might consider are as follows: • Expansion of the business may bring in new customers who may ask for a haircut in addition to other services. This will increase revenues from hair cutting also. Expansion may also take away some customers who liked the small size of the salon (provides a more relaxed feeling.) • Offering a variety of services will allow Henry to quote package prices on different combinations of services. • Henry will have more responsibilities in overseeing the expansion, additional employees and more customers reducing the quality and quantity of personal time available.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Evaluate


Topic Area: Different Data for Different Decisions


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140. The manager of a profit center of a large electronics manufacturing corporation made some projections regarding sales and profits for the upcoming final quarter of the year. The managers' performance evaluation and compensation depended significantly on his ability to meet budget goals. The manager discovered that the final quarter would have to be a particularly good quarter in order to meet these goals. He decided to implement a sales program offering liberal payment terms in order to pull some sales that would normally occur next year into the current year. Customers accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he sold some equipment that was not being used and realized a significant profit on the sale. Are these actions ethical? Why or why not?

Each of the manager's actions needs to be considered separately: • Liberal credit terms - Acceptable, a business strategy that should be judged on how it affects the firm's operations and profits • Attempt to pull sales from one period to another - may not be acceptable. If the purpose of the change in credit terms is simply to move sales from one period to another, then the result is misleading financial reports and fraudulent; if the objective is to increase sales through management of credit policies, then acceptable. • Sale of equipment - may be acceptable, a business decision that should be judged on how it affects the firm's operations and profits; may not be acceptable if done just to show a short term gain that would improve current period profit.

AACSB: Ethics

AICPA FN: Reporting Blooms: Evaluate




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141. The controller of one division of a large diversified firm is compensated by salary plus bonus. The bonus is a significant part of total compensation, and is based directly on the profits of the division. Thus, the controller has an incentive to find ways to increase profits, including the delay of discretionary expenses such as research and development, delay of maintenance and repair of manufacturing equipment, and delay of sales promotions. Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if anyone?

Since the actions contemplated by the controller are not in the best interests of the company, these actions are probably not ethical, and are in conflict with the ethical standard of integrity. The situation displays both conflict of interests and an attempt to subvert the firm's performance incentive system. Probably both the incentive system and the controller are to blame in this case. While it is not reasonable to expect that the firm can design a bias-free incentive system, it appears that the firm has not done an acceptable job of developing a system that will reward performance based upon the firm's critical success factors, instead of short-term profits only. Improvements in the incentive scheme are possible and necessary. On the other hand, the controller cannot be excused by taking advantage of the opportunity to manipulate profits. The standards are clear on the required professional behavior in this case, and the controller has ignored them for self-serving purposes.

AACSB: Ethics

AICPA FN: Reporting Blooms: Evaluate




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142. Brookside Shoe Company, a manufacturer of women's shoes, recently implemented a quality improvement program aimed at streamlining the manufacturing process. Carl Anderson industrial engineer and a resident expert on process improvement, was assigned the task of implementing the program. Anderson's first task was to educate all the employees involved with the production process. He sent a memo to representatives in product design and development, materials management (including purchasing), marketing, distribution, customer service and accounting, in addition to those in the production department, inviting them to attend an information session on the improvement program. He began the meeting by thanking all those who were present (over 35 in number) and spent the first hour explaining the need for such a program. Soon after, the attendees were engaged in a discussion. Several questions were raised during the discussion. Among these, three questions stood out. 1. What is the need for including members from design, marketing, and other functional areas when the improvement program's focus is on streamlining the manufacturing process? 2. What is the role of the cost management expert in this program? 3. Finally, why should the machine operators be involved, as they are not engineers? Consider the three questions that stood out in the discussion. Assume the role of Carl Anderson and prepare a response addressing the questions.

1. A process improvement program typically cuts across departmental boundaries by extending through most of the components of the value chain of a company. It is important to recognize that decisions made in the upstream activities such as product design and development affect downstream activities (i.e., manufacturing, distribution and customer service). Individuals from these downstream functions can make design engineers aware of the implications of design decisions on their respective activities. For example, the production engineer can inform the design engineer that certain designs are more compatible with the existing assembly line than others (the latter will cost more to produce). Therefore, the inclusion of individuals from different functional areas is to educate and inform each other. 2. The cost management expert assumes a very significant role in a process improvement program by providing cost-benefit information pertaining to different improvement initiatives. Once again, this activity adds value to the process improvement program because the cost manager can identify the cost implications of upstream activities on the downstream activities. For example, a product designed with common parts simplifies the purchasing activity, production activity and customer service activity (if and when required---e.g., repairs are easy). 3. The involvement of machine operators in such an improvement initiative is critical because the operator is closest to the process and therefore is likely to be very knowledgeable about how the process works. Consequently, the operator can visualize problems and point them out to other individuals in the team. Many operators might also be in a position to offer suggestions for improvements. The involvement of operators in improvement teams is becoming more common in the modern business environment.


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AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Create

Difficulty: 3 Hard Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.



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143. Sandra Pilsden, the Vice-President for Human Resources in Learning, Inc. was concerned about a recent memo she had recently received from the CEO's office regarding the possibility of outsourcing the payroll function to Salary Experts, a growing provider of a variety of human resource services. She was shocked that the CEO's office had discussed this matter with the Board of Directors, but failed to consult her. Linden was preparing for a meeting with the CEO. In reading the memo and its attachments, Linden observed the following comparison of costs in a report prepared by the controller's office:

Pilsden also noted that Salary Experts quoted a fixed fee of $125,000 and variable processing costs of $7.50 per employee transaction. She did not believe that the company will actually save money by outsourcing the payroll function. For one, she did not think that the company will actually save all of the above mentioned amounts. She knew that the payroll department manager could not be removed from the company because he had to oversee the payroll function and serve as a liaison with the outside company. However, all other employees in the department would likely not be required. a. Assume Learning Toys has 14,000 employees on its payroll. Can the company save money by outsourcing the payroll function? b. What are the pros and cons of outsourcing the payroll function?

a. Outsourcing the payroll function will involve an out of pocket expense of $230,000 ($125,000 + ($7.50 * 14,000)). Moreover, some of the payroll department's costs will continue to be incurred by the company:

The total cost associated with outsourcing the function will be $413,350 compared to $439,350 if the payroll function is not outsourced. Therefore, Learning Toys, Inc. can save exactly $26,000 by outsourcing the payroll function. More money might be saved if there are savings in utilities. A portion of the unavoidable costs could also be recovered if this space is sublet or put


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to productive use in some other manner. b. Several considerations must be made before deciding to outsource the payroll function. • Efficiency of the outside party vis-a-vis carrying out the function internally. • In some cases, it may be worthwhile to outsource certain activities. • Employee morale due to layoffs (with possible implications on the reputation of the company). • Possibility of outsourcing other functions and their repercussions on employees. • Sensitivity of the nature of the information being handled by individuals external to the organization.

AACSB: Analytic


Difficulty: 2 Medium Learning Objective: 01-04 Identify current trends in cost accounting.

Topic Area: Cost Accounting in Distribution


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144. Levis Strauss and Co., maker of Levi's familiar 501 and 505 brands of jeans, also make a "Signature" brand that was introduced several years ago for discount retailers such as Wal-Mart. Levi's strategy with the new jeans was to sell a competitively priced pair. The jeans were to be about one-half the price of the familiar 501 and 505 jeans. To get costs down Levi's would: • Use cheaper fabrics and materials. • Shun costly mass-market advertising. • Strictly limit the number of fits, styles, and colors. • The Signature brand had a good first year of sales; assume that results for the second year and later are not yet in. a. Assess the new strategy at Levi. What do you think are the potential benefits and risks? b. How will the firm's value chain and balanced scorecard change as a result of the new strategy?

a. Recent annual reports show that sales and profits on the Signature line are doing well. Levi's has a portion of its web site devoted to the Signature line (http://www.levistrauss signature.com). The risks of the new line are that it might pull the company from what has been a tradition of differentiated products (501, 505) to cost leadership (the Signature line), leaving consumers confused about the Levi brand. The risks of the new brand include: • Could turn off department store customers of Levi's core jeans • Signature jeans could end up looking and feeling shoddy • After a period of buzz, may sink below the radar • Customers may get bored and want more variety Michael Porter's observation might be that the firm is in risk of getting "stuck in the middle" between the cost leadership and differentiation strategies. b. The firm's value chain will likely change little, as the manufacture of the jeans will continue to be produced in low-cost facilities worldwide. The largest difference in the jeans will be in the fabrics used, the design, and the variety of jeans offered. The balanced scorecard for Levi's is not likely to change much either, as noted above for the value chain. Levi Straus uses the BSC in its shared services center in Eugene Oregon.

AACSB: Analytic


Difficulty: 2 Medium Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.



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145. Mr. Lee is the production Manufacturing Manager of Cathy Company. It is the beginning of the month and he storms into the controllers department, clutching a large folder of reports. "Why am I getting so many reports? I don't need them nor do I want all the details. I've delegated responsibility to my managers so I don't have to worry about details. You've got to do something about this, John." John, the controller, starts to think about the problem that seems to have come about as the company decentralized with many layers of responsibility. He has a vague memory of something he learned from his old cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce the paper flow. Briefly describe the concept of the hierarchy of performance reports.

The hierarchy of performance reports starts at the lowest level of responsibility and builds towards the top. Each manager receives the performance report for his or her own subunit in addition to the performance reports for the major subunits in the next lower level that he or she manages. As the reports are prepared, the total cost line, for example, from the cost center is included as one line in the performance report of the production department along with total costs for the production departments other work centers. The production department's total cost is included as a single line item in the report for the next level up, and so on. As one moves up the organization chart, the reports get more and more aggregated; as one moves down, they get more disaggregated.

AACSB: Analytic


AICPA BB: Resource Management Blooms: Apply


organizations. Topic Area: Value Costs for Control and Evaluation


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146. Adair Company has been busy over the first few years of its existence in penetrating its market and gaining a respectable market share. To facilitate this, Mr. Adair, the CEO, and his controller, Mr. Brown, have been developing the annual master budgets. To date this approach has worked well. Adair has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Horwitz, has suggested to Mr. Adair that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Adair agreed to readily. Mr. Horwitz explained to Adair's departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process. a. What benefits will accrue to Adair under this new budgeting system? b. What behavioral issues might arise for departmental managers and for production workers? c. What is the most probable long-term reaction of Adair's people to the participative budget system?

a. There will be improved communication and coordination between departments; problems might be identified sooner since the managers are closer to the action; and accountability and performance evaluation should be easier to do. b. Departmental managers will face some positive points in that they are more likely to be motivated to work with a budget they had a hand in developing. They also should accept the results of the performance evaluation and accountability more readily. Unfortunately, there may be tendencies to pad the budget before the fact or manipulate the figures after the fact in order to look better for the evaluation, especially if there are monetary rewards involved. Production workers will have some similar reactions depending on the degree of their involvement in the process. If they consider the budget fair, they will work with it; if not, they might sabotage it. c. If there is a perception that the process has worked well, all involved will be motivated to continue with the process. If there is a feeling that things have not worked well or evaluations have been unfair, they will not work with the process.

AACSB: Analytic

AICPA BB: Critical Thinking Blooms: Analyze Difficulty: 3 Hard


Topic Area: Value Costs for Control and Evaluation


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147. Traditionally, companies in the United States have employed a "push" manufacturing style. Studies in Activity Based Management and Quality Control have indicated that this approach is filled with many non-value-added activities, which increase overall costs and reduce profits. The "push" style is being replaced with a "pull" approach. Briefly describe the major differences between the push and pull approaches. What non-value added activities are eliminated in a pull manufacturing system?

A push manufacturer begins by forecasting total orders for a time period. The manufacturer orders materials based on the forecast. Production schedules are produced based on the forecast. Production is then "pushed" through. Because production is based on sales, the company may end up producing units for which there is not as much demand as forecast, or have too few units available of a product for which there is heavy demand. This creates costs of storing excess inventory and opportunity cost of lost sales. In addition, because units are pushed through the system, the timing of receiving materials is not balanced to the production of activities, particularly at production bottlenecks, which results in a wasteful buildup of inventories, either temporary or permanent. Push production can reduce motivation to improve quality and can reinforce motivation to overuse non-bottleneck activities. A pull manufacturer "pulls" production through the process by customer orders, rather than "pushes" them through with master production schedules. A sales order triggers a production order. The production order triggers orders to suppliers, who ship parts immediately. The Just-in-Time approach is flexible to customer needs and requires lower inventory costs than traditional methods. Because suppliers tend to be preapproved and more reliable, costs of quality are reduced. Non-value added activities such as storage, quality control, downtime, waiting time are avoided in a pull manufacturing system.





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148. The New York Times recently reported that a number of publicly-held corporations have been accused of illegally doctoring hourly employees' time records. Examples included: • Workers sued Family Dollar and Pep Boys, accusing managers of deleting hours from their time records. • More than a dozen former Wal-Mart employees said in interviews and depositions that managers had altered time records to shortchange employees. • The Department of Labor reached two back-pay settlements with Kinko's photocopy centers after finding that managers had erased time for 13 employees. When interviewed, many of the managers cited pressure from upper-management and the impact of their actions on their own compensation as underlying causes for their actions. All of the companies strongly denied encouraging such illegal and unethical behavior by managers. Compensation experts interviewed agreed that the companies' incentive performance systems may have contributed to the managers' behavior. (New York Times , Apri l 4, 2004) a. Explain how the incentive performance systems of the above named companies could have contributed to this illegal behavior by managers. b. Discuss the ethical issues involved in the design of incentive performance systems. In designing a performance-based incentive system, what measures should companies take to avoid illegal and unethical behavior by supervisors?

a. Incentive performance systems can lead to unethical conduct when managers fear losing their jobs when they fail to keep costs down. In addition, when a significant part of the managers' compensation comes from bonuses based on minimizing costs or maximizing profits, managers may be tempted to underreport labor hours in order to cut payroll costs. Many of the managers cited pressure from supervisors to erase hours, refuse to pay overtime, and otherwise manipulate payroll records. b. Designers of performance-based incentive systems should identify the trade-offs between effective rewards, goal alignment, monitoring, and cost in designing an effective performance-based system. It is clear that upper-level management must strongly encourage ethical behavior by mid-level managers. Some of the possible measures that could be taken are: • Regular written reminders of "payroll integrity" from top management. • Distributing paper time records to employees, so that they can challenge significant discrepancies in their reported hours. • Establishing an anonymous call-in line for employees to report possible unethical behavior.

AACSB: Analytic

AACSB: Ethics AICPA BB: Critical Thinking





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